A reinsurance contract is typically an agreement between a ceding insurer and a reinsurer, which affords no rights of third parties, including underlying insureds to access the reinsurance contract. Typically, an insured cannot bring a direct action against the reinsurer because there is no contractual privity. But sometimes, in some reinsurance relationships, the actions of the reinsurer, whether contractual or not, may open the door for a direct action.
In court, at the pleading stage, sometimes the reinsurer’s motion to dismiss a complaint is superseded by the insured’s motion to amend the complaint. That happened in late 2022 in a federal court in Arizona.
In Midtown Hotel Group LLC v. Selective Insurance Co. of America, No. CV-22-01395-PHX-JAT (D. AZ Dec. 19, 2022), a hotel group sued its insurer and its reinsurer after it was not paid for a property damages claim. The reinsurer moved to dismiss the complaint and the insured moved to amend its complaint. The court found that amending the complaint was not a futile act and allowed the insured to amend while denying the motion to dismiss as moot.
In holding for the insured, the court found that the insured could, under Arizona law, plead facts sufficient to make out a third-party beneficiary claim for breach of contract as well as a claim that the reinsurance contract expressly allows for a direct action against the reinsurer. The court noted:
And in any case, because [the reinsurer] has not disclosed the reinsurance agreement and moved for summary judgment, this Court would be obliged to take as true on a motion to dismiss any well-pleaded allegations [the insured] chooses to make regarding the contents of the reinsurance agreement.
This is an important holding. Because the reinsurance agreement was not put before the court (no motion for summary judgment was made by the reinsurer), the court had no clue what the agreement contained and had to accept as true the allegations raised by the insured in its original complaint and in any amended complaint on a motion to dismiss.
In discussing whether to allow amendment to the bad faith cause of action, the court stated:
Because, as discussed, the relationship between the parties remains unclear due to the secrecy of the reinsurance agreement, [the insured] could possibly allege facts which would give rise to direct liability against [the reinsurer] on a bad faith breach of contract theory. Amendment would therefore not necessarily be futile with respect to [the insured]’s bad faith claim against [the reinsurer].
The court also allowed the insured to amend the aiding and abetting cause of action finding it not futile. The court noted that the insured could go beyond what it proposed to amend but also noted in a footnote that:
although [the insured] alleges in the [proposed amended complaint] that it was deprived of benefits it should have received under the reinsurance agreement, it is not readily apparent that [the insured] has adequately alleged that it is the intended primary beneficiary of the reinsurance agreement.
As a result of the ruling the burden shifted to the insured to amend the complaint sufficiently to withstand a further motion to dismiss. Of course, as the court pointed out, if the insured failed to file the amended complaint the motion to dismiss would be reinstated. Subsequent decisions in this case indicate that the amendment was filed and that another motion to dismiss may be pending.
This case is a helpful guide for reinsurer’s to avoid a direct action but also a warning to reinsurers who take over the claims handling of the direct claim.